Value Assessment Of Goodwill And Risk Of Premium Acquisition

Review the long history of economic development,Western capitalist countries have gone through five huge merge and combination eras,which is horizontal acquisition,vertical acquisition,mix acquisition,across-industry acquisition and multinational acquisition.Over 100 years,the global economic pattern has been formed.Therefore,business acquisition and combination has put a significant impact on the world economic history.Compare to western countries,the capital market of China has been opened for only couple of years.In terms of progress and developing scale,the acquisition and combination market in China has a great potential to grow.Business acquisition is a huge project,acquirer has to assess the value of acquiree's asset and record in their book.According to principle of prudence in accounting policy,it is the first priority to measure the acquiree's asset,which have significant impacts on decision-making and future operation.This paper is focused on case study,Australia law firm Slater&Gordon acquired UK Quindell specialist services business.Analyze internal and external elements to figure out the potential risk in this acquisition and its financial dilemma.Due to consideration in acquisition is too much higher than net identifiable asset in acquiree,it led to huge amount in goodwill.Moreover,high risk on impairment of goodwill will cause considerable loss for a company.Therefore,how to collect internal and external useful information to decrease the risk on impairment of goodwill is important for acquirer.This paper aims to discuss the nature of goodwill in order to discuss whether the accounting policy is rational.In this part,based on current academic research this paper is going to analyze the relationship between goodwill and stock price.According to western and Chinese researchers'work,there are two fundamental problems for premium acquisition.One is current stock market transaction policy and the other is information transparency in capital market.The current stock transaction policy results in stock issue at a discount price,which leads to increase outstanding stock shares.If the capital market hypnosis is valid,when the acquisition information disclosed,investors and stakeholders will have a quick reaction in a short time.Once investors are anticipating a promising future management on both parties,they are going to purchase stock shares.When the stock market volume rises up,the stock price has been pushed up.In the short run,this reaction will cause stock pricing higher than its real value,which also means the goodwill has been over estimated.Next,this paper analyzed a non-controlling interest Chinese acquisition case on GEM(Growth Enterprise Market).Firstly,it analyzed the background of web game industry and the motivative of acquisition.Secondly,it compared the financial position and financial performance in both parties for before and after acquisition.Thirdly,it discussed the risk on premium acquisition.Then this paper is mainly discussed about Ohlson Stock Pricing Model.Given the limitation of Chinese capital market and its unique attribute,this paper has adjusted Ohlson Model in order to fit Chinese stock market.This paper selected two study objectives on GEM and selected data sample across three years.It established a multiple linear regression model to analyze sample data.It analyzed the regression output to interpret all variables in order to explain the relationship between goodwill and stock price.At last,this paper has a conclusion that premium acquisition is highly likely to have a huge risk of impairment on goodwill.But there is sort of ways to mitigate the risk on goodwill impairment,such as improve quality of accounting information,enhance internal audit and external supervision,and collect financial and non-financial information related to acquisition.In addition,in order to prevent management manipulate enterprise's stock price and cash out for self-interest,company has to set a series of measure,such as make a prevention before it happen,control when it takes place,take a remedy after occurred.This paper suggest regulator to hire professional third party to assess underlying assets,and in future three years to monitor acquire and acquiree's financial performance.For acquire,the annual test on impairment of goodwill is not enough.Except internal annual test,the company need hire a professional consulting firm to reassess the book value of goodwill.Additionally,establish big data filter system to investigate relevant information as much as possible to monitor entire acquisition process.